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It looks like a Federal Reserve rate increase next month is practically a done deal.
Three members of the central bank’s rate-setting committee have given speeches this week that clarify the Fed’s intentions when the panel meets Dec. 13-14. Taken together, the speeches imply that a Fed rate hike is likely.
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Yellen speaks
The most prominent of the speeches is the one given today by Janet Yellen, chair of the Federal Reserve. In prepared remarks for Congress’s Joint Economic Committee, she said the rate-setting Federal Open Market Committee decided two weeks ago that an increase in the Federal funds rate “could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the committee’s objectives.”
That quote doesn’t quite describe the statement that the Fed released Nov. 2 after its monetary policy meeting. That statement doesn’t contain the phrase “relatively soon.” It doesn’t even contain the words “relatively” or “soon.” It says that the Fed would “wait for some further evidence of continued progress toward its objectives.”
Let’s make a deal
Instead, Yellen seems to be describing deal-making among committee members. At least, that’s the conclusion that I drew when I read Yellen’s remarks along with a speech that Eric Rosengren gave Tuesday. Rosengren, president of the Federal Reserve Bank of Boston, is a member of the rate-setting Federal Open Market Committee, or FOMC. In September, Rosengren voted with the minority to increase the Federal funds rate. This month, he didn’t. Why? At a speech in Portland, Maine, Rosengren said this:
“At the FOMC meeting earlier this month, however, I felt that the changes in the FOMC statement were well aligned with the notion (and the market perception) of a high likelihood of tightening in December. As a result, I did not dissent.”
Then James Bullard, president of the Federal Reserve Bank of St. Louis, spoke yesterday in London. In his PowerPoint presentation, he wrote, “A single policy rate increase, possibly in December, may be sufficient to move monetary policy to a neutral setting.”
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Economists see the green light
Taken together, these statements from rate-setting committee members imply that the central bank will raise the federal funds rate next month.
Stuart Hoffman, chief economist for PNC Financial Services Group, says Yellen’s remarks today are “sending a strong signal that the FOMC will hike the federal funds rate at their Dec. 13-14 meeting. No change in her mantra that the FOMC will proceed gradually to hike rates thereafter, consistent with our November baseline forecast of two rate hikes in 2017 (June and December).”
Hoffman says recent economic data support the case for a December rate increase. Housing starts in October were way up and the core Consumer Price Index was up 2.1 percent from the previous October.
Lindsey Piegza, chief economist for Stifel Fixed Income, interprets Yellen’s comments more cautiously than Hoffman and I do. Piegza says:
“While stopping short of ensuring a second-round increase at the upcoming meeting just four weeks from now, the chairman noted a rate increase could come ‘relatively soon if incoming data provide some further evidence of continued progress toward the Committee’s objectives.’ In other words, barring an indication of momentum tilting to the downside, even maintaining the moderate status quo should be enough to sway Committee members in favor of a second-round hike by the end of the year.”
Heck yeah
Piegza notes that Yellen wants the Fed to raise the federal funds rate gradually because of lingering uncertainty about the health of the economy. Piegza tartly adds: “Not that we ever expect clear, concise comments from any Fed officials, let alone the chairman herself, but something along the lines of, ‘gosh darn is the economy strong, heck yeah we’re going to raise rates in December,’ would be a refreshing change from the Fed-speak double-talk.”
Made me laugh.
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